Major purchases, like a mortgage loan, are important to understand, frontwards and backwards.

And especially before you apply for one, there are 7 things you need to know:

1. Know your credit score

Before you start looking at houses or fill out a mortgage application, you need to know your credit score.

In the United States, majority of lending decisions are based off your credit score. Your credit score is a three-digit number that reflects your credit risk.

In other words, the likelihood you will pay the agreed amount back to the lender.

Mortgage lenders especially refer to your credit score to determine your eligibility for a mortgage loan. Your score will also influence what kind of rate they can offer you.

The better your credit score, the better the loan and interest rate you will receive.

If you want to review your credit score, you can request a report from one of the three major credit bureaus. Once you have the most up to date report, review it carefully to make sure there are no errors that could negatively impact your score. If there are, contact the bureau immediately to resolve those issues as soon as possible.

You are in total control of your credit score. If your credit score is not as strong as you want it to be, there are ways to improve it. For example:

Pay off any outstanding debts

Sign up for automatic payments

Create a payment plan for monthly debt payments

By implementing these financial strategies into your life, you can easily improve your credit score.

Depending on your financial and personal situation, you can choose a mortgage that aligns with you. You don’t want to choose a mortgage term that places you in a financial rut. Carefully decide on a mortgage that you can comfortably handle.

4. Know what loan programs are available

Mortgage lenders also offer special loan programs to those who qualify.

6. Know your debt-to-income ratio

Your debt-to-income (DTI) ratio is a calculation that shows the amount of your monthly income that is directed toward your debt payments.

This ratio shows mortgage lenders, and you, how you will be able to manage monthly expenses, such as mortgage payments.

You can calculate your DTI ratio by dividing all your monthly debt payments by your gross monthly income. These debt payments usually include the following:

Auto loans

Credit card debt

Student loans

Personal loans

Your gross monthly income is your monthly pay before taxes and other deductions like health insurance are taken out.

For example, let’s say that you earn $2,900 per month. Your auto loan payment is $300, and your student loan payment is $400.

To calculate your DTI, you will divide the total of your monthly payments ($700) by your gross income ($2,900).

700 / 2900 = .2413. Which equals out to be a DTI of 24 percent.

In this scenario, this is a good DTI ratio. Ideally, lenders prefer to see borrowers with a ratio between 28% to 31% or lower.

If your DTI ratio is higher than 31%, you will need to lower it in order to get approved for a loan. And just like your credit score, there are ways to improve it, for example:

Pay off your debt

Increase your income

Delay borrowing

Put down a larger down payment

In other cases, some loan programs allow a higher DTI ratio as high as 50%. However, there are certain qualifications that need to be met in order to be eligible. For example, lenders could require a specific down payment amount, credit score or amount of money invested into the transaction. You can ask your lender for this information.

Your DTI ratio proves to lenders that you can financially handle your debts because you are earning more than you are owing. By using these strategies, you can lower your DTI ratio.

This calculation influences what kind of rates and terms you will be offered. Keeping your DTI at a desirable level is important so you can obtain a mortgage.